[StBernard] Calculating fair market values for casualty losses

[Westley Annis]

I had received correspondence from a CPA collegue in Metairie that through a
phone conversation with an IRS representative that IRS planned to initiate
audits for the Katrina losses effective immediately for any return that
represented a tax benefit of $10,000 or greater.  Within a week three of my
clients were contacted for audit reviews.  Fortunately these clients, like
nearly all of my clients, had specific detail of the losses incurred to
support the numbers represented on the tax return.  Undoubtedly these
reviews will go unchallenged.  I call this to your attention to be sure that
you have the losses documented using the casualty loss guide that IRS had
initially passed around just after the storm. This will greatly minimize
your anxiety should an examiner appear at your doorstep, literally.  My
feeling is that since the losses are greatly widespread to a magnitude quite
unlike IRS has ever seen that some might take unfair advantage of the
casualty to use to their advantage maybe thinking that IRS will never get to
all of these returns in our lifetime.  Then it occured to me that possibly
IRS is hiring the laid off SBA and FEMA warm bodies to run interference for
them to visit the filers with tremendous tax benefits to see if anything
glaring comes to their attention to warrant further investigation.  I am
supposing here, mind you.  But it is so much better to be cautious at this
sensitive time.

Initially IRS advised that to calculate the fair market values on your
personal property was to use the original cost and depreciate each year of
ownership by 5% assuming 2005 acquistions were 100% of the original cost
values and 2004 acquisitions were at 95% of the original cost values, so
forth and so on until you got to 50% and go no lower.  However, two weeks
ago, the IRS advised another "safe harbor" method that would never be
challenged by the IRS and that was to take the "replacement values" of the
lost items and depreciate by 10% per year until you go to 50% and go no
lower.  For example a sofa that cost $800 3 years ago under the earlier IRS
advised method would be valued for fair market purposes at $680 ($800 X
85%).  Safe Harbor methods would be to take that same sofa today that might
cost $1,000 replacement value to $700 (1,000 X 70%).  Not much different but
the amounts might start to add up.in your favor.  Between the two methods
you should be safe.  "There are other safe harbors" concerning your real
property that I will not into right now.  I believe I gave enough
information to spin most heads for now including my own for all that we have
experienced.

Dan


Dan Johnson
Certified Public Accountant
257 W Causeway Approach
Mandeville, LA  70448
985-626-1102  Voice
985-727-0834  Fax